INTRODUCTION 1.1 Problem statement
Objectives of the study
This study is mainly to analyse the production costs of Shampoo in UVN and to suggest implication policies to improve production costs of this company
To describe cost factors of production costs
To identify the losses and analyse their impacts to the costs
To compare Unilever Vietnam’s production costs with companies’ production costs in the other countries
To find the gaps and recommend how to improve to the business
Research methodology
When studying and analysing the production costs; people generally rec- ommend using both secondary data and case study research methods, comparison as well as simulation approaches combined
Secondary data for this study come from internal manufacturing Unilever Vi- etnam and the other countries in the same cluster (Cluster: a group of countries in the same region).
The case study method often involves simply observing what happens to, of a single participant or group of individuals (Hayes, 2000)
In-depth analysis of cluster companies' data will identify key items for study, including cost elements Leveraging practical experience in the field enhances the study's realism, ensuring that the results are applicable and relevant.
Significance and limitation of the study
Reducing manufacturing costs is essential for increasing profitability, as it allows companies to produce more with existing resources or maintain output while using less However, many organizations mistakenly believe that simply issuing a memo to enforce cost cuts will suffice This strategy often backfires, leading to decreased employee morale as staff feel undervalued and burdened by the pressure to reduce expenses Such discontent can undermine a company's ability to deliver quality products or services, as excessive cuts in critical areas inevitably result in diminished quality.
An effective cost reduction program requires careful management planning, a deep understanding of company expenses, a forward-looking vision, and a commitment to customer satisfaction It goes beyond mere accounting entries and involves executing a strategic action plan with active employee participation.
Reducing production costs not only enhances overall profitability but also supports various business activities through the savings generated Additionally, effective cost reduction strategies foster a positive mindset among employees, promoting the idea of saving rather than merely cutting expenses.
The study on Improving Production Costs of Shampoo at Unilever Vietnam specifically examines the cost structure related to production Chapter IV will detail this cost structure, which aligns with the Cost of Goods Sold (COGS) commonly referenced in accounting and finance However, it is important to note that comparing material costs is not relevant in this context, as the production process at Unilever Vietnam does not include the costs associated with materials.
Unilever aims to become a leading supply chain company globally by centralizing its sourcing operations in specific countries, such as Singapore, which manages contracts for the entire region This strategy enables suppliers to provide Unilever with competitive pricing, as countries within the same region utilize materials from the same source at uniform prices Consequently, material costs are excluded from production expenses In accounting terms, the cost of goods sold (COGS) encompasses three primary components: material costs, production costs, and logistics costs.
In the next chapter, this study will show more detail what people call cost of goods sold – COGS in theory It looks like Supply chain costs in the company
Production cost, finally, is remainder of the cost of goods sold excluded material and logistic costs The study will define clearly its elements However, it should mainly consist of:
Labour costs (wages and allowances)
Equipment by means of depreciation expenses
Consumptions: water, electricity, fuel, etc
In summary, this study does not focus on the others of the COGS, but it will study production costs only.
Organization of the research study
The initial chapter provides an overview of the study's background and objectives It is succeeded by a literature review that highlights key theories related to production, cost, and production management The subsequent chapter offers an overview of Unilever, leading into a detailed analysis of production costs at Unilever Vietnam, utilizing UVN data and regional insights.
There are also some simulations to make this study sturdier Finally, the study also mentions the findings, conclusion and recommendation.
LITERATURE REVIEW 2.1 Theory of production and costs
Definitions
Production involves converting inputs like land, labor, capital, and raw materials into goods and services This process generates the supply necessary to meet our needs and wants within the market Economists often analyze production by categorizing it into different periods for a clearer understanding of its function (Besanko, 2011).
Production is the process of transforming one material into another through chemical or mechanical methods, ultimately enhancing the product's utility for users This value addition occurs at every stage of processing, contributing to the overall worth of the final product (William, 1995).
Production/operations management is the systematic process that integrates and transforms diverse resources within an organization’s production subsystem into value-added products and services, all while adhering to the organization's established policies.
The operations function of an organization focuses on transforming various inputs into products or services that meet the necessary quality standards (William, 1995).
According to Besanko (2011), inputs or factors of production, including labor and capital equipment, are essential resources that firms utilize to manufacture goods and services, while the resulting goods or services are referred to as outputs.
Normally, inputs of the firms are land, labour, capital, management, entrepre- neur and technology
The production function is a mathematical representation of the technological options available to a firm for configuring its production process It illustrates the relationship between inputs and outputs, defining the maximum quantity of a commodity that can be produced within a specific timeframe using certain quantities of inputs and technology This function can be expressed in various forms, including schedules, graphical lines or curves, algebraic equations, or mathematical models.
Production function is part of an organization, which is concerned with the transformation of a range of inputs into the required outputs (products) having the requisite quality level
The production function converts inputs such as land, labor, capital, and entrepreneurship into output, reflecting the current state of technological knowledge As knowledge has accumulated over time, we can achieve greater output from the same combination of inputs today compared to the past.
Following concepts of Paul and Robin (2009) and The general form a produc- tion function may be algebraically expressed as:
Total Product ( Q ) = f ( L, K, T ) Very Long Run
Where Q = the quantity of output produced per time unit
(Land, labors, capital, and so forth)
Relative prices of factors of production
At points C and D, the firm is technically efficient It is producing as much out- put as it can with the production function Q = f (L) given the quantity of labor it
Figure 2.3 - Technical Efficiency and Inefficiency – Labor
L, units of labour per year
Q, u n it s of output per y ear
Q = employs At points A and B, the firm is technically inefficient It is not getting as much output as it could with its labour, Besanko (2011)
The production function illustrates the highest possible output achievable with a specific combination of inputs, leading us to express the relationship as Q < f(L, K) This notation highlights that a firm may produce an output quantity that falls short of the maximum level obtainable based on the inputs utilized.
Effective management requires control over variable inputs, such as fertilization and feed rates, which can be adjusted during operations In contrast, fixed inputs remain constant throughout the trial period, including elements like harvesting pumps, feed silos, vehicles, and land Additionally, random inputs arise from external factors related to nature or economic conditions that are beyond management's control.
Short Run and Long Run
In the short run, at least one factor of production, typically capital inputs like machinery and buildings, remains fixed or inelastic During this period, a business can increase its output by adjusting more variable factors, such as labor, raw materials, and components.
Figure 2.4 - A specific Short-run production function
Short-run production function chart
Panel (a) shows the production function, Q = 2KL, with K is fixed at Ko = 1
Panel (b) shows how the short-run production function shifts when K is in- creased from Ko to K = 2
In the long run, businesses can adjust all factors of production, allowing for the expansion of operations This growth can occur through the addition of labor and capital, as well as the integration of new technologies Essentially, the long run signifies a timeframe where the supply of all inputs is flexible and adaptable.
The duration for transitioning from the short run to the long run differs across industries For instance, a newly established sandwich delivery business in a local town may require a specific timeframe to make this shift Assuming the business operates from leased premises, utilizes two leased delivery vehicles, and employs five full-time and part-time staff, the timeline will depend on various factors such as market demand, operational efficiency, and resource management.
Source: developed for this study
Figure 2.5 - Relationship between Inputs, Outputs and Costs
In the short term, businesses can boost production by utilizing additional raw materials and hiring extra staff However, if demand rises significantly, they may quickly transition into the long run by leasing a larger facility, acquiring more capital equipment, and renting additional delivery vans.
For certain businesses, the long run may only span a few weeks, while industries reliant on costly capital equipment may experience a long run that extends over several months or even years.
Costs are defined as those expenses faced by a business when producing a good or service for a market
The figure 2.6 – production function and total cost curve
Production function and Total cost curves
The chart illustrates the production function curves and total costs associated with a cookie factory, providing a straightforward representation without delving into detailed cost analysis.
Every business faces costs and these must be recouped from selling goods and services at different prices if a business is to make a profit from its activities
In the short run, a firm will have fixed and variable costs of production Total cost is made up of fixed costs and variable costs
By Gregory Mankiw (2010), these costs relate do not vary directly with the level of output Examples of fixed costs include:
Rent paid on buildings and business rates charged by local authorities
The depreciation in the value of capital equipment due to age
The costs of staff salaries e.g for people employed on permanent contracts
Interest charges on borrowed money
The costs of purchasing new capital equipment
Cost in the short run
Short run – a period of time sufficiently short that at least some of the firm’s fac- tors of production are fixed, (Frank, 2009)
Figure 2.7 - Short-run Total cost curve
The short-run total cost curve, STC(Q), represents the aggregate of the total variable cost curve, TVC(Q), and the total fixed cost curve, TFC Total fixed cost consists of the expenses associated with fixed capital services, denoted as rK.
Short-run total cost curve
Total cost (TC) is the sum of variable costs (VC) and fixed costs (FC), highlighting that, in the short run, costs comprise both types Variable costs typically include labor and materials, while fixed costs involve plant and equipment Many firms can quickly hire additional labor and procure raw materials, often within weeks However, certain inputs, such as installing new equipment or expanding factory space, may require a longer adjustment period, potentially taking a year or more.
The fixed cost curve is represented as a horizontal line, indicating that fixed costs remain constant regardless of the output level In contrast, the variable cost curve slopes upward, reflecting the fact that variable costs change with the quantity produced It is important to note that the total cost curve shares the same slope as the variable cost curve; however, it is positioned above it by an amount equal to the fixed costs.
The firm’s average fixed cost (AFC) is its total fixed cost (TFC) divided by the quantity (Q) of outputs (AFC = TFC/Q)
Average total cost (ATC) represents the total cost incurred per unit of output, calculated using the formula ATC = TC/Q In contrast, marginal cost (MC) measures the change in total cost (ΔTC) relative to the change in output (ΔQ), indicating how much the cost increases with each additional unit produced, expressed as MC = ΔTC/ΔQ (Paul, 2009).
Cost in the long run
In the long run, there are no fixed inputs or fixed costs; all inputs and all costs are variable
Cost rule – to produce any given level of output, the firm will choose the input mixed with the lowest cost
Cost functions – is similar to the cost in the short run It prefixes “LR” in the factors
The Long-Run Average Cost (LAC) curve serves as the outer envelope of the Average Total Cost (ATC) curves The Long-Run Marginal Cost (LMC) equals the Short-Run Marginal Cost (SMC) at the quantity where the ATC is tangent to the LAC At the minimum point of the LAC, the LMC, SMC, ATC, and LAC are all equal.
Relationship between long run and short run costs
For many businesses, the classification of total costs into fixed and variable categories varies with the time frame considered For example, a car manufacturer facing a short-term period of just a few months cannot modify its factory size or number Consequently, to increase production, the manufacturer must hire additional workers at existing facilities, making certain costs fixed in the short run.
In the long run, companies have the flexibility to expand existing factories, construct new ones, or shut down outdated facilities, making factory costs a variable expense (Frank, 2008).
Figure 2.8 - The family of Cost Curves Associated with a U-shaped LAC
Long run Average Cost curve
In the short run, a firm's cost decisions are fixed, leading to distinct short-run average total cost curves for small, medium, and large factories Conversely, the long run average total cost curve reflects the firm's ability to adjust its factory size in response to varying production levels As the firm progresses along this long run curve, it optimizes its production capacity by adapting the size of its factory to meet demand effectively.
The graph illustrates the relationship between short-run and long-run costs, highlighting that the long-run average total cost curve is significantly flatter and shaped like a U compared to the short-run average total cost curve Notably, all short-run curves are positioned on or above the long-run curve, reflecting the increased flexibility firms have in the long run Essentially, in the long run, firms can select the most advantageous short-run curve, whereas in the short run, they are constrained to the curve they previously chose.
The time it takes for a firm to reach its long-run production capacity varies significantly depending on the industry While major industries may require years to adjust, businesses like coffee shops can implement new equipment and adapt within a matter of days Consequently, there is no definitive timeframe for a firm to modify its production facilities (Frank, 2008).
Cost minimization and profit maximization
Economists studying various market structures, including perfect competition, typically assume that a firm's primary goal is to maximize profit This assumption requires clarification of what "profit" entails and an understanding of why firms generally aim to achieve this objective.
Economic profit is defined as the difference between total revenue and total cost, encompassing both explicit costs, which are payments to non-owners for resources, and implicit costs, representing the opportunity costs of using the firm's own resources In contrast, accounting profit is calculated by subtracting only explicit costs from total revenue, without considering opportunity costs.
To predict what any entity – a firm, person, committee, or the Government – will do under specific conditions, some sorts of assumption must be made about its goal
Figure 2.9 - Short run profit maximization using the Total Revenue – total cost method for a perfectly competitive firms
This exhibit illustrates the profit-maximizing output level for a perfectly competitive firm, such as Computech It demonstrates the relationship between total revenue, total cost, and output at a market price of $70 per unit The firm achieves maximum profit by producing 9 units per hour, where the gap between total revenue and total cost is the largest Conversely, producing fewer than 3 units per hour results in losses for the firm.
Profit maximization is also shown in part (b) @ $250/hr corresponds to the profit maximizing output of
9 units/hr represented in part (a).Source: Tucker, 2011
In a perfectly competitive market, firms are price takers with no influence over market prices Instead, they focus on managing internal factors, such as inputs and outputs, to maximize profits A key strategy for achieving this is minimizing costs.
Production management theory
A supply chain is the comprehensive sequence of events and processes that transforms a product from its raw state to the final consumer, often described as "from dirt to dirt." This intricate system has been fundamental to commerce since its inception For instance, General Mills oversees the entire supply chain for its cornflakes, beginning with the cultivation of corn seeds on a farm, followed by harvesting, processing, packaging, and distribution to retail stores Once on the shelves, the cornflakes are sold to consumers, but if they remain unsold past their expiration date, they are removed and discarded.
A supply chain encompasses the entire journey from the original supplier, such as a farmer with seeds, to the final consumer, like someone eating cornflakes This process includes every step in between, whether it's the transformation of a grain of sand into an Intel semiconductor or the lifecycle of a Ford Explorer that concludes in a junkyard, where its usable parts are salvaged Understanding these interconnected stages is essential to grasping the complexities of supply chains.
The Association for Operations Management defines supply chain as "the global network used to deliver products and services from raw materials to end consumers through an engineered flow of information, physical distribution, and cash" (John, 2008) This definition highlights the intricate connections and processes involved in transforming raw materials into finished goods, emphasizing the importance of efficient information flow and distribution in the supply chain.
Supply chain management (SCM) is set to be the primary management process for production systems in the 21st century, overseeing the flow of materials, information, purchased parts, personnel, and financial resources from diverse vendors, often located far from the main production facility The domestic appliances industry exemplifies effective SCM, transitioning from a model where companies designed and manufactured all components in-house to one that embraces co-makership, collaborating with suppliers for critical parts such as hermetic compressors, plastic components, and electrical systems SCM introduces various management principles that facilitate the planning and control of supplier networks, ensuring alignment between fluctuating customer demand and supplier capacity.
Supply Chain Management (SCM) involves the design, planning, execution, control, and monitoring of supply chain activities to create net value and enhance competitive infrastructure Key functions of production systems management include designing the supply chain for new corporations, planning operational and strategic activities, scheduling and executing production, resolving conflicts, and monitoring production processes Financial management is crucial for generating value for all stakeholders, including owners, employees, society, and the environment This chapter will elaborate on the manufacturing functions of the supply chain through a systems approach based on the Viable System Model (VSM) by Beer, and will highlight the role of Enterprise Resource Planning (ERP) systems in supporting these functions.
The flow of materials consists of three key phases: first, raw materials are sourced from a physical supply system into a manufacturing company; second, these materials undergo processing during the manufacturing phase; and finally, finished goods are distributed to end consumers through an efficient physical distribution system.
A customer can engage with multiple suppliers while also supplying various customers, forming a network of interconnected supplier-customer relationships This interconnectedness signifies that all parties involved are integral members of the same supply chain.
The figure 2.10 – supply, production and distribution system
The supply chain typically involves multiple companies interconnected through supply and demand relationships, rather than just a single supplier and customer In this dynamic, one customer purchases a product from a supplier, enhances its value, and then provides it to another customer.
To get the most profit, a company must have at least four main objectives:
Manufacturing, Planning and Control Physical Distribution
DOMINANT FLOW OF PRODUCT AND SERVICES
DOMINANT FLOW OF DEMAND AND DESIGN INFORMATION
Summary
This chapter provides a literature review essential for understanding the theory of production, cost of production, and the introduction of supply chain management as applied by multiple companies today It emphasizes the strategies of cost minimization and profit maximization that are actively discussed and implemented within these organizations.
Theory of the production costs in Unilever as this study will describe in the chapter IV right after company overview in the next chapter.
UNILEVER VIETNAM’S INTRODUCTION 3.1 Unilever group worldwide
Vision
They will develop new ways of doing business with the aim of doubling the size of the company while reducing the environmental impact
They believe in the ability of their brands to enhance people's lives and prioritize ethical practices As their business expands, they acknowledge their growing responsibilities, particularly regarding global issues like climate change Their commitment to considering the broader impact of their actions is deeply rooted in their values and is essential to their mission.
Mission
Unilever's corporate mission focuses on enhancing life by addressing daily needs in nutrition, hygiene, and personal care, offering brands that empower individuals to feel and look their best while maximizing their overall quality of life.
We will inspire people to take small everyday actions that can add up to a big difference for the world
Vitality is central to their identity, reflected in their brands, team, and core values It embodies various interpretations; for some, it signifies energy, while for others, it represents a holistic sense of well-being—an invigorating state of body and mind that fosters a feeling of being truly alive.
Vitality is dedicated to expanding its business by tackling crucial health and nutrition challenges, with a strong emphasis on children's and family nutrition, cardiovascular health, and effective weight management strategies.
The essence of culture is reflected in the concept of Vitality, which emphasizes maintaining the highest standards of behavior towards colleagues, communities, and the environment By integrating Vitality into daily life, organizations can positively influence those they interact with and the world around them.
Values
As a multi-local multinational, the company is committed to tackling global environmental and social issues through proactive measures and collaboration with stakeholders at local, national, and international levels.
Nutrition, Hygiene and Personal Care
Company history
Unilever’s corporate vision focuses on enhancing people's appearance, well-being, and overall quality of life, demonstrating a deep understanding of 21st-century consumers This mission reflects a consistent thread throughout Unilever’s history, showcasing the company’s commitment to meeting the evolving needs of its customers.
In the 1890s, William Hesketh Lever, founder of Lever Bros, envisioned Sunlight Soap as a groundbreaking product aimed at promoting cleanliness and hygiene in Victorian England His mission was to make cleanliness commonplace, reduce women's workload, enhance health, and contribute to personal attractiveness, ultimately making life more enjoyable and rewarding for users.
Long before the term "Corporate Mission" was coined, our foundational ideas have remained central to our business Although the language and the concept of women solely handling housework may now seem outdated, their essence continues to drive our values.
Unilever's remarkable journey spans over three centuries, shaped by significant historical events such as economic booms, depressions, world wars, evolving consumer lifestyles, and technological advancements Throughout this time, Unilever has consistently developed products that enhance everyday life, reducing time spent on household chores, improving nutrition, and enabling individuals to enjoy food while caring for their homes, clothing, and personal well-being.
Unilever is committed to achieving success by upholding the highest standards of corporate behavior towards employees, consumers, and society Throughout the years, the company has launched and participated in numerous initiatives aimed at sourcing sustainable raw materials, protecting the environment, and supporting local communities.
In the opening decade, Unilever introduced its Path to Growth, a strategic five-year plan, and in 2004, it intensified its commitment to meet the demands of 21st-century consumers through its Vitality mission By 2009, Unilever unveiled a new corporate vision focused on fostering a better future daily, emphasizing brands that enhance people's well-being and overall life satisfaction.
Unilever Vietnam
Legal – before July 2009, The Unilever Vietnam consists of two companies – Unilever Vietnam JV (joint venture from its local partner Vietnam National Chemical Corporation – VinaChem) and Unilever Vietnam Limited
Unilever and VinaChem have reached an agreement to restructure the organ- ization in March 2009 With this change, Unilever Vietnam Joint Venture
Co has become 100% foreign-owned after Unilever’s acquisition of 33.33% of the shares in the joint venture (UVN profile)
Mission – alignment with the Company mission, Unilever has own mission That is ‘Make every Vietnamese life better through health, hygiene and nutri- tion’
Before 1995, Unilever had no presence in Vietnam, but after entering the market in 1995, it rapidly emerged as one of the fastest-growing companies within the Unilever Group globally The company set an ambitious goal to establish itself as a 'Global Citadel.'
Citadel is a crucial player in the decision-making landscape, requiring companies to achieve a specified sales threshold to be recognized as a key market influencer The sales target is determined based on market size and aligns with the UVN profile standards.
3.3.2 Overview of manufacturing Unilever Vietnam
Unilever operates one in-house factory and collaborates with twelve third-party factories across Northern Vietnam to the Mekong Delta The company partners with these third-party manufacturers for products with lower hygiene requirements, such as detergent powder and dishwashing liquid Meanwhile, the in-house facility focuses on producing food items and personal care products, including toothpaste, shampoo, and skin cleansers.
They have about 1,000 persons working in the manufacturing with 20% indi- rect labours Every year, they can produce more than 450 thousand tons of products
A passionate and highly effective team
A safe, clean and enjoyable working environment
Factories with highly efficient operations, appropriate technology
Preferred regional sourcing sites with lowest cost, best quality and highest customer service
End of the day, cost is the most important story Lowest production cost will be the first priority schedule and target
Sections above shows Unilever global overview as well as Unilever Vietnam vision, mission and manufacturing targets It provides a picture of the com- pany to understand its operation
In the upcoming chapter, the analysis will thoroughly examine production costs at Unilever Vietnam, drawing comparisons with similar countries within the same region The chapter will conclude with key findings derived from this comparative analysis.
PRODUCTION COST ANALYSIS 4.1 Introduction
Supply chain model in Unilever
In Unilever, we are using SCOR model
The Supply Chain Operations Reference (SCOR) model, co-developed by Pittiglio, Rabin, Todd, McGrath, and AMR Research, serves as a vital tool for aligning supply chain strategies with performance objectives It categorizes the supply chain into five key processes: Plan, Source, Make, Deliver, and Return SCOR aims to break down these processes into specific metrics that emphasize critical performance attributes, including reliability, responsiveness, flexibility, cost, and asset management.
As explained by the co-author, the five SCOR processes encompass these meas- urable activities:
Plan – assess supply resources; aggregate and prioritize demand requirements; plan inventory for distribution, production, and material requirements; and plan rough-cut capacity for all products and all channels
Source – Obtain, receive, inspect, hold, issue and authorize payment for raw ma- terials and purchased finished goods
Make – Request and receive material; manufacture and test product; package, hold, and/ or release products In this study, Make is production or manufactur- ing
Efficient delivery involves executing order management processes, generating accurate quotations, and configuring products to meet customer needs It includes creating and maintaining a comprehensive customer database, along with a detailed product and price database Key responsibilities encompass managing accounts receivable, handling credits and collections, and overseeing invoicing Additionally, the delivery process entails executing warehouse operations such as picking, packing, and configuring items, as well as creating customer-specific packaging and labeling Consolidating orders, shipping products, managing transportation processes, and overseeing import/export activities are also crucial Finally, verifying performance ensures that all processes meet established standards for quality and efficiency.
Figure 4.1 – Three physical phases of the supply chain
Plan Source Plan Source Plan Source Plan Source
Return – Process defective, warranty, and excess returns, including authoriza- tion, scheduling, inspection, transfer, warranty administration, receiving and ver- ifying defective products, disposition and replacement
4.1.2 Supply chain and production costs relationship
Unilever views its supply chain as a cohesive family, with production (or "Make") being a crucial component This perspective highlights that production costs are an integral factor influencing the overall supply chain expenses.
The supply chain does not inherently reduce production costs; however, production costs are directly linked to supply chain expenses Utilizing the Supply Chain Operations Reference (SCOR) model enables organizations to gain clarity on their operations, allowing production management teams to accurately assess real production costs and identify opportunities for improvement.
Typical Profit and Loss (P & L) Account in Unilever
Unilever's profit and loss account begins with the calculation of Gross Sales Value, which is determined by multiplying the volume sold by the full official list price This figure represents the turnover the company would achieve without any customer discounts related to delivery size or in-store promotions Key components of Unilever's P&L include Gross Sales Value, turnover, and the impact of discounts on overall revenue.
However, like many businesses, Unilever offers discounts to its trade customers
It classifies those on the P&L account as Trade Terms Structure.
4.2.2 Concepts of cost in Unilever
Trade Terms Structure (TTS): as described above The two main types of the trade terms structure are:
Business Building Discounts: discountings given to trade customers for consumer price promotion (e.g., buy one get one free), consumer coupons, visibility and avaibility programs, etc
Efficient Operations Discounts are incentives offered to trade customers to enhance logistics and payment efficiency These discounts may include benefits for ordering full pallets instead of individual cases or rewards for timely payments, encouraging better operational practices.
The turnover at Unilever is calculated by subtracting specified trade terms from the gross sale value Another critical metric in Unilever's Profit and Loss statement is Gross Profit, which is defined in general accounting terms as the remaining amount after covering all costs associated with sourcing materials, transforming them into finished products, and delivering them to the customer's warehouse These expenses are categorized as Supply Chain Costs (SCC).
Supply Chain Costs (SCC) consist of:
Raw material costs: costs of the formulatuion of a product
Packaging material costs: costs of the packaging of a product
Production costs: manufacturing costs of a product, i.e., factory costs such as labour, energy, depreciation on plant, etc (will be described in detail)
Bought in products: total cost of purchased finished goods, i.e., products bought in already manufactured by a co-packer
Distribution: cost of warehousing and distributing the product to a customer’s warehouse
Other supply chain costs: other supply chain costs associated with manufacturing products
This study aims to emphasize the reduction of production costs, which is a fundamental value of the manufacturing team at Unilever Vietnam, rather than a response to cost issues or competitiveness challenges.
Advertising costs encompass the expenses associated with creating advertisements, such as producing TV commercials and developing online campaigns, along with the media costs incurred for purchasing airtime to broadcast these ads.
Promotional costs encompass expenditures related to trade-oriented promotional materials aimed at trade customers, including point-of-sale displays and expenses for competitions and conferences that support product launches It is important to distinguish these costs from those related to trade terms structure, as they serve different purposes in the promotional strategy.
Promotional costs – expenditure consumer – costs of promotional activities directly orientated at consumers This includes of sampling, direct mail, leadflets, consumer competitions, promotional packs with consumer gifts with purchase
Indirect costs are expenses incurred in operating a company that are not directly tied to supply chain management or advertising and promotional activities These costs encompass various departments such as marketing, sales, research and development (R&D), human resources, information technology, and finance.
Many businesses often focus solely on Operating Profit, but Unilever's internal Profit and Loss account highlights a deeper metric known as trade contribution It is crucial for management to understand and assess whether their earnings sufficiently cover the company's overall tax obligations and financing costs.
Unilever's total cost structure encompasses several key components, including trade expenses, supply chain costs, marketing and sales expenditures, overhead or indirect costs, as well as general firm costs such as taxes and financing.
The primary focus of this study is to enhance production costs, specifically targeting the manufacturing costs within the supply chain.
4.2.3 Production cost structure in Unilever
By extracting and zooming in on the production cost, there are four main ele- ments in the cost structure
Table 4.1 – Typical production cost structure ( 2 )
In the next sections, it shows comparison with the other countries
Labour is a crucial human resource in manufacturing, encompassing both direct and indirect roles Direct labour includes workers on the shop floor who are actively involved in the production of goods, while indirect labour comprises support functions such as engineering, quality assurance, quality control, and health, safety, and environment departments that facilitate the manufacturing process.
Cost structure in Unilever
Typical Profit and Loss (P & L) Account in Unilever
Unilever's profit and loss account begins with the calculation of Gross Sales Value, derived by multiplying the volume sold by the official list price This figure represents the turnover the company would achieve without any customer discounts related to delivery size or in-store promotions Key components of Unilever's P&L include Gross Sales Value, which reflects the potential revenue before adjustments for discounts.
However, like many businesses, Unilever offers discounts to its trade customers
It classifies those on the P&L account as Trade Terms Structure.
4.2.2 Concepts of cost in Unilever
Trade Terms Structure (TTS): as described above The two main types of the trade terms structure are:
Business Building Discounts: discountings given to trade customers for consumer price promotion (e.g., buy one get one free), consumer coupons, visibility and avaibility programs, etc
Efficient operations discounts are incentives offered to trade customers to promote streamlined logistics and timely payments For instance, customers may receive discounts for ordering full pallets instead of individual cases, or for making payments on time These discounts not only enhance operational efficiency but also foster better relationships between suppliers and customers.
The gross sale value, after accounting for specified trade terms, results in turnover, a crucial metric for Unilever Following this, Gross Profit is another key measure in Unilever's Profit and Loss statement, defined in general accounting terms as the remaining amount after covering all costs associated with sourcing materials, manufacturing finished products, and delivering them to customers' warehouses These expenses are categorized as Supply Chain Costs (SCC).
Supply Chain Costs (SCC) consist of:
Raw material costs: costs of the formulatuion of a product
Packaging material costs: costs of the packaging of a product
Production costs: manufacturing costs of a product, i.e., factory costs such as labour, energy, depreciation on plant, etc (will be described in detail)
Bought in products: total cost of purchased finished goods, i.e., products bought in already manufactured by a co-packer
Distribution: cost of warehousing and distributing the product to a customer’s warehouse
Other supply chain costs: other supply chain costs associated with manufacturing products
This study aims to emphasize the reduction of production costs, highlighting that it is not driven by cost issues or competitiveness concerns, but rather reflects a core value of the manufacturing team at Unilever Vietnam.
Advertising costs encompass the expenses associated with creating advertisements, such as filming a TV commercial or developing a web campaign, as well as the media costs incurred for purchasing airtime to broadcast these ads.
Promotional costs encompass expenses related to trade-oriented promotional materials aimed at trade customers, including display and point-of-sale materials, as well as costs associated with competitions and conferences designed to support product launches It is important to distinguish these specific costs from those related to the promotion charged under trade terms structures.
Promotional costs – expenditure consumer – costs of promotional activities directly orientated at consumers This includes of sampling, direct mail, leadflets, consumer competitions, promotional packs with consumer gifts with purchase
Indirect costs refer to the expenses incurred in operating a company that are not directly tied to supply chain or advertising and promotional activities These costs encompass various departments, including marketing, sales, research and development (R&D), human resources, information technology, and finance.
Many businesses focus solely on Operating Profit, but Unilever's internal Profit and Loss account includes a crucial metric known as trade contribution Management must recognize and consider whether their earnings sufficiently cover the company's general tax obligations and all associated financing costs.
Unilever's total cost structure encompasses several key components, including trade expenses, supply chain costs, marketing and sales expenditures, indirect overhead costs, as well as general firm costs such as taxes and financing.
The primary focus of this study is to enhance production costs by targeting manufacturing expenses within the supply chain.
4.2.3 Production cost structure in Unilever
By extracting and zooming in on the production cost, there are four main ele- ments in the cost structure
Table 4.1 – Typical production cost structure ( 2 )
In the next sections, it shows comparison with the other countries
Labour is a crucial component of manufacturing, encompassing both direct and indirect human resources involved in the production of goods Direct labour refers to workers on the shop floor who are actively engaged in the manufacturing process, while indirect labour includes roles such as engineering, quality assurance, and health, safety, and environment departments that support production without directly participating in it.
Production costs for shampoo account for approximately 35% of the total expenses, representing a significant portion compared to other elements within the overall production costs and the industry cluster Subsequent sections will provide a comparative analysis within the shampoo category.
Figure 4.3 – Chart of typical production cost structure
Depreciation accounts for fixed assets, representing 17% of total production costs, indicating a modest investment in machinery In theory, higher depreciation correlates with reduced labor costs Today, companies focus on effectively investing in and utilizing their assets.
Equipment – mentioned about Repair and Maintenance costs It consists of costs to replace the spare parts, out-source maintenance services
Utility – costs for all kinds of non-ingredient (or bill of material) called utility costs or consumption costs It can list out as below:
Chemicals for water and waste water treatment
Companies are increasingly prioritizing utility consumption, particularly in categories where water is a key component of their products To enhance sustainability, they are actively working to minimize waste and eliminate non-essential uses of resources Their primary efforts are directed towards reducing electricity and fuel consumption by exploring alternative solutions.
Renting cost – sometimes the business requires renting the equipments, tools for ad-hoc or back up in case of equipment breakdown
Figure: 4.4 – Detail production cost chart
Indirect consumables encompass allowances for shop floor personnel, outsourced services, and various materials not listed in the bill of materials These items include lubricants, cleaning cloths, tapes, glue, inks, and chemicals used in laboratories and for water and wastewater treatment.
01.Direct labour02.Indirect labour03.Depreciation04.Repair & Maintenance05.Utility (consumption)06.Indirect consumables
Comparison the production costs among companies in other countries
In this section, it will show Vietnam shampoo production costs in comparison with the cluster’s item by item By using percentage, it can be more comprehen- sible
Looking at the chart below, direct labour costs in UVN is in the highest group
C u ch i C ika ra n g H e fe i B a n g k o k Am li D o o m D a e jo n K a n d la Ma n il a H a ri
VN Indo China Thai'd India India S.Korea India Phi India
Total Production costs (euro/ton)
Source: developed for the study
In this case, Unilever China is the best and it is 12% for UVN to hit the bench- mark
Labor costs in Vietnam remain competitive when compared to benchmark countries like China and Thailand, yet direct labor expenses are relatively high A significant factor contributing to this is the low labor productivity, which highlights a productivity gap that will be discussed in the final section of the study.
Unilever's labor productivity varies significantly between its factories, with the Hefei factory in China achieving approximately 1.69 tons of shampoo produced per laborer per day, compared to only 0.67 tons per laborer per day at Unilever Vietnam.
In order to improve this cost, UVN has to reduce the number of the direct labors
In the other hand, they have to improve labour productivity There are some op- portunities:
They should reduce the manual work by increasing automation This requires investment
There should have better line mapping They have to ensure no re-
Cu chiCikarang Hefei Bangkok Amli Doom Daejon Kandla Manila Hari
VN Indo China Thai'd India India S.Korea India Phi India
27% 28% nies develop the multi-skill program where people can operate at least two different machines at the same time
It should have more coaching for people to operate the equipment ef- fectively It also support the mentioned multi-skill programs
Indirect labour of the shampoo category in UVN is also very high Indirect la- bour consists of the group of people who does not directly create finished goods
When comparing the Hefei factory in China to the benchmark, there are no significant gaps; however, there is a 4-5% difference in costs compared to the lowest-cost factory This indicates that China is not effectively managing its indirect labor In contrast, Vietnam and the Kandla factory in India offer the lowest indirect labor costs To address this issue, the company should consider increasing the workload assigned to indirect laborers.
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VN Indo China Thai'd India India S.Korea India Phi India
Unilever utilizes depreciation to assess factory size, which significantly impacts production costs To align with Unilever Global standards and meet market demand for volume, the company aims to increase investments rather than reduce depreciation expenses, focusing on maximizing the utilization of fixed assets.
UVN shampoo has experienced a 20% depreciation, placing it in the low investment category, which presents a challenge for the management team to enhance its value while maintaining production cost efficiency A key objective is to maximize returns on investment while minimizing direct labor costs to boost productivity In contrast to China, where labor is inexpensive but lacks high skill levels, the focus is on investing in technology to reduce labor dependency in manufacturing processes.
Apart from direct labours reduced, it can prevent quality issues caused by human
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Repair and maintenance costs are directly proportional to the investment In this case, UVN shampoo R&M costs are in the lowest group
Repair and maintenance costs account for only 9% of production expenses, making them the lowest among various costs However, a deeper analysis reveals that this low expenditure correlates with reduced investment, which can hinder overall output and increase direct labor costs This presents a paradox where management must balance the need to minimize expenses with the necessity of investing more for improved performance.
Highly automated factories, such as those in Hefei, China, often incur significant repair and maintenance costs To manage these expenses, they typically enter into maintenance contracts with professional contractors Additionally, the reliance on automated equipment leads to the need for costly spare parts, further increasing overall operational expenses.
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VN Indo China Thai'd India India S.Korea India Phi India
In summary, while low investment can reduce repair and maintenance costs, it is not an ideal approach due to the associated higher labor costs Therefore, the management team must find a balance to optimize expenses effectively.
Utility consumption consists of water, electricity, fuel oil, diesel oil … and the other energy resources
All most Unilever factories, they try to minimize the utility consumption
In the UVN case, the production cost is significantly higher compared to other elements, indicating potential for improvement To address this, UVN has prioritized reducing this cost and is exploring various strategies to achieve more efficient production.
To effectively reduce utility consumption, it's important to recognize that certain fixed usages cannot be minimized For example, a standard 1.2m tube light typically consumes around 40W In cases where alternative lighting options are not available, users may find it challenging to lower their energy usage.
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17% power consumption In this case, they have to turn it off in location where they do not have any activities
To achieve higher outputs while maintaining the same utility costs, companies often operate under fixed utility conditions This strategy allows for increased productivity without a corresponding rise in utility expenses.
Alternative cost-effective methods for energy savings include using 16mm tube lights, which can reduce energy consumption by up to 60% compared to traditional 32mm tube lights Many factories are now opting for natural lighting solutions, such as skylights, transparent louvers, and windows, to minimize the use of artificial lighting during the day.
In order to reduce these expenses, UVN has to control usage in the factory Figure 4.12 – Indirect consumables chart
In comparison to the benchmark (this case, 5% in South Korea), a big gaps that UVN needs to improve As mentioned in previous sections, indirect consuma-
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VN Indo China Thai'd India India S.Korea India Phi India
11% 11% bles are materials that they do not include in the recipe of the products, so cut- ting down this consumption does not affect to the quality For instance:
Lubricant: need to review the schedule for lubrication It also requires to review the usage amount per each lubrication point
Chemicals: similar to the lubricant, it requires controlling well the stock, storage and usage Making sure there is not disposal chemical due to ex- piration
Cleaning cloths: make sure that people use it for proper purposes and at the minimum level
A comparison with industry benchmarks reveals key factors contributing to the high production costs of Unilever Vietnam's shampoo products To address these challenges, the company should prioritize improving its weaknesses There are numerous opportunities for enhancing shampoo production efficiency, particularly in areas such as depreciation, where top management must develop a strategic roadmap for implementation.
To effectively reduce production costs in Vietnam, prioritizing certain actions is essential, as the current expenses are manageable and do not necessitate immediate changes.
Production cost elements
According to the Principles of Microeconomics by Taylor and Weerapana (2009), Average Total Cost (ATC) is calculated by dividing the total costs (TC) of production by the quantity (Q) produced, representing the cost per unit of production This concept is comparable to the production costs discussed in Unilever's operations.
The six key expenses below form the production cost for the hair care products
In the certain period, indirect labour, depreciation and a part of Utility do not vary with the quantity of the output produced They are:
To effectively reduce costs, it is essential to optimize the utilization of fixed costs while minimizing variable expenses.
Unilever's production costs are closely linked to the quantity produced, known as volume By considering both volume and associated expenses, the company represents its production costs through an equation referred to as the 'production function.'
Production costs are directly related to expenses and inversely related to output volume As production volume increases, fixed costs are spread over more units, resulting in lower production costs Conversely, maintaining the same volume while reducing expenses also leads to decreased production costs Unilever adheres to these principles in its operations.
Cost simulation
Recall from previous chapter, Unilever Vietnam is struggling with the Euro by Euro of the shampoo product in the same region illustrated in the benchmarking chart
The following simulations base on the production function and the Unilever ori- entation above
Table 4.4 – Detail production costs of Haircare liquid, 2011
The average production cost of Unilever's hair care product is €92 per ton, a crucial metric for assessing manufacturing performance This article presents simulations that alter specific factors while maintaining others constant, allowing for a comparison between the modified results and the actual production costs recorded in 2011.
If the volume increases by 10%, all fixed items will remain unchanged in the short term, while other factors will see a slight increase This scenario will lead to adjustments in various related factors.
Fixed items: Indirect labour, Depreciation and a part of Utility (70%), 30% of the Indirect other and 30% of the Repair and maintenance (R&M)
Table 4.5 – production costs reduced when volume increased by 10%
Total expenses (in mio VND) 15,421.0 18,571.1 19,149.2 17,259.0 70,400
Source: developed for this study
For effective financial planning, companies should allocate 30% of their budget for outsourced long-term service contracts, ensuring that maintenance costs are covered even during periods of low output Additionally, it is crucial to recognize that 70% of electricity consumption is dedicated to operating ventilation systems, including fans and air conditioners, as well as lighting This means that facilities must remain operational regardless of fluctuating usage levels.
Variable costs encompass direct labor and 30% of utility consumption, which includes water and electricity for processing equipment Although the chart indicates a 5% increase, it is expected to remain below this threshold despite the absence of cost surcharges Typically, factories strive to maximize output by fully utilizing all available resources.
Due to a 10% increase in volume, total production expenses rose to approximately VND 70.4 billion, up from VND 68.7 billion In terms of EUR, expenses decreased from €92.2 to €85.8 per ton, reflecting a 6.9% increase despite the volume growth Consequently, the company stands to gain at least €6.4 per ton with this volume increase, indicating that higher production volumes lead to greater profitability.
Increasing production volume can lead to higher total expenses, but the cost per unit decreases due to fixed costs being spread over more units This strategy is not exclusive to Unilever; many companies aim to optimize fixed asset utilization to enhance profitability.
In 2011, the factory's electricity consumption amounted to EUR 4.1 per ton of product A 10% reduction would only save EUR 0.41 per ton, yet this could result in approximately VND 300 million in total savings These funds could be utilized to enhance working conditions through better facilities or to bolster marketing and sales activities.
Table 4.6 – production costs reduced when one of the Utility consumption (elec- tricity) by 10%
Source: developed for the study
With the continuous rise in electricity prices, many individuals are increasingly concerned about their energy costs By reducing power consumption, they can significantly benefit and alleviate some of the financial strain associated with rising utility bills.
To achieve significant savings, it is essential to focus on reducing utility consumption across various resources For example, minimizing the use of water, fuel oil for burners, and diesel oil for boilers can lead to substantial cost reductions and improved efficiency.
Findings from the case study
Cost reduction in production is a key priority for Unilever Vietnam, where the focus extends beyond maximizing output of their primary product, shampoo The factory team is actively engaged in various initiatives aimed at enhancing production efficiency and lowering costs.
Unilever Vietnam emphasizes the importance of cost-saving practices among its employees, requiring them to consistently consider strategies for reducing production costs Each year, the factory generates a 'cost-saving list' that outlines various activities aimed at achieving this goal.
Table 4.7 – Extraction of the saving project list – Supply chain - target in
UVN-North - Import Tinopals Directly
UVN-North - Reduce Transportation cost NN-BNDC
UVN-North - Using Solar Energy - LN and HS
UVN-North - Reduce transportation cost LN and HS
UVN-North - Reduce DO consumption for boiler
UVN-North - Power saving by Inverter-control to Kemac dust filters
UVN-North - NN to run during meal break for energy savings
UVN-North over weight reduction
UVN-North - Reduce transportation cost LN and HS
UVN-North - Reduce Processing fee of DW at Lix North
UVN-South – Overweight reduction for big size
UVN-South - Overweight reduction for small size
UVN-South - Selling Steam to Cico from HV
UVN-South - Using KAP machine at CICO
UVN-South - Replace DO by Biomass for Boiler
UVN-South - reduce MH of Vim TC 500ml
UVN-South - Reduce percentage of Javel loss at HV plant
UVN-South Transportation cost reduction for PA
The list includes several items related to the supply chain, such as transportation costs associated with delivery and the reduction of diesel oil (DO) usage for boiler production Additionally, the reduction in utility consumption, as mentioned in the previous section, plays a significant role in optimizing overall efficiency.
In the production area, they also find the ways to reduce overweight This item brings saving a lot for the company
Each year, UVN Manufacturing is required to meet specific targets from cost-saving initiatives In 2011, they successfully generated approximately $1.2 million in savings, with over $300,000 attributed to the implementation of a biomass boiler.
To support this, management team has deployed many workshops and pro- grams
Focused improvement (or Kaizen 3 ) is one of those to generate the new ideas and implement the approved ideas
The previous sections have highlighted Unilever's production costs and compared them to industry benchmarks The analysis indicates that the production costs for hair care products in Unilever Vietnam are not competitive with the established standards.
Kaizen, a Japanese term meaning "improvement" or "change for the better," embodies a philosophy focused on the continuous enhancement of processes across various fields, including manufacturing, engineering, game development, and business management This approach is also applied in sectors such as healthcare, psychotherapy, life coaching, government, and banking, emphasizing the importance of internal competition For instance, Unilever Vietnam's sourcing plans for shampoo must align with this principle to ensure optimal supply chain efficiency.
Unilever Vietnam is committed to optimizing production costs for its shampoo products by actively engaging employees in various factory programs and events These initiatives not only demonstrate tangible cost reduction achievements but also foster a positive mindset among the workforce, contributing to the company's overall success.
In the last chapter coming, the study will propose some ideas to the UVN.
CONCLUSION AND RECOMMENDATION 5.1 Conclusion
Recommendation
Shampoo production in UVN faces significant cost disadvantages compared to leading competitors like Thailand and China To enhance its competitive edge, UVN must focus on improving various cost elements associated with shampoo manufacturing.
Labor costs: both direct and indirect labours They have to improve productivity 4
Depreciation: it is less than the other countries’ However, this is one of the way to reduce the labour costs that UVN has to balance
Utility consumption: has a big room to improve
Indirect consumables: it is a big proportion in the production cost Reducing this item will improve the total production costs
Manufacturing professionals often face a demanding schedule and experience significant pressure from their companies To alleviate these challenges, Unilever's management team must implement effective strategies to support their workforce and enhance productivity.
Unilever prioritizes product quality in its production process, emphasizing the importance of doing things correctly from the start Sustainability is a key focus, ensuring environmental considerations are integrated into operations Additionally, fostering a cost-saving mindset is essential for driving efficiency and effectiveness in the business.
Organise events to get fully involved from the employees of the whole levels Kaizen contest as mentioned in the previous section is one of the good examples
Provide more coaching to the employees Make people understand that production cost reduction is a practice, not theory
Apart from the obvious opportunities resulted from the analysis; hereunder, it will show some ideas for production costs reduction
Productivity is an essential metric that evaluates the efficiency of production processes It represents the ratio of the output generated to the inputs used in production Specifically, productivity is defined as the total output produced per unit of input utilized.
Lean production enhances efficiency by streamlining manufacturing processes and minimizing waste, including setup times, excess inventory, unnecessary handling, waiting periods, low equipment utilization, defects, and rework This approach allows businesses to achieve greater output with reduced resources—less human effort, equipment, time, and space—while increasingly aligning with customer demands for precision and quality.
Unilever Vietnam should streamline its organizational structure by reducing the three management levels—plant manager, assistant manager, and shift leader—to a maximum of two levels This simplification will enhance efficiency and help the company minimize indirect labor costs.
Multi-skill development for factory operators is essential for reducing direct labor costs In China, this approach has been successfully implemented for years, resulting in lower direct labor expenses In certain areas of the shop floor, a single operator is capable of managing multiple machines simultaneously, enhancing efficiency and productivity.
Unilever Vietnam has significant opportunities to enhance its shampoo production efficiency by addressing low waste materials and stock levels, similar to the benchmark factory in China Collaborating closely with the Research and Development (R&D) department can help resolve packaging material defects, while engaging with the Planning function will assist in minimizing stock levels.
Unilever Vietnam's shampoo production currently ranks low in equipment efficiency within its cluster To enhance this performance, the company should prioritize investing in human resources by fostering a better working environment While striving to meet customer and consumer satisfaction, it is equally important to focus on internal employee needs Implementing additional training and coaching for operators will significantly contribute to improving overall efficiency.
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Benchmark of production costs Unilever Asia
Appendix 1: Benchmark data in Unilever Asia
Bangla VN Indo China Thai'd Pakistan India Japan Japan India S
Korea India Phi India Sri
Chitta Cu chi Cika- rang Hefei Bangkok Rahim Amli Kata Saga Doom Daejon Kandl a Manila Hari Co- lombo
OEE chart
C h itta C u ch i C ik a ra n g He fe i B an g ko k Ra h im A m li K ata S a g a D o o m D ae jo n K an d la Ma n ila Ha ri C o lo m b o
Bangla VN Indo China Thai'd Pakistan India Japan Japan India S.Korea India Phi India Sri Lanka